KiwiSaver schemes to review fees every year and prove savers get value for money
Tuesday, 13 April 2021
KiwiSaver scheme managers have been told they must review their fees every year, and demonstrate they are providing savers with “value for money”.
The Financial Markets Authority (FMA), which regulates KiwiSaver schemes, says economies of scale have not typically been shared with savers by scheme managers through lower fees.
The FMA has issued “guidance” to KiwiSaver schemes on how it expected them to prove they were not charging unreasonable fees, which are prohibited by KiwiSaver laws and regulations.
FMA investment management director Paul Gregory , “strongly encouraged” KiwiSaver scheme providers publish value for money reports each year.
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“Adopting this approach will help some schemes highlight where they need to improve their products’ value for money, for instance by reducing fees, enhancing the value provided, or ceasing to offer poor-value products,” Gregory said.
It would also lead to greater transparency, and enable savers to make more informed decisions about which schemes they invested with, he said.
In Britain, super savings schemes were required by law to publish value-for-money reports, he said.
Some KiwiSaver managers had told the FMA that it did not need to intervene on fees and value for money because the market would punish poor value.
Gregory said the guidance did not tell managers what to charge and accpeted managers could profit from competently managing investors’ money.
“But the long-term nature of most investing means New Zealanders can be punished for long periods, perhaps irretrievably, before the market ever gets around to doing something,” he said.
Many KiwiSavers were not highly engaged with KiwiSaver, and the FMA could and should try to influence the industry’s approach to make it happen sooner, he said.
Failure to conduct the annual fee reviews could trigger an FMA “response”, Gregory said.
These could include a “stop order”, for example, prohibiting the scheme from advertising, or a “direction order” to instruct a manager to do something specific, such as to stop charging an unreasonable fee.
The regulator could also take court action over unreasonable KiwiSaver fees.
Sam Stubbs, chief executive of the Simplicity KiwiSaver scheme said KiwiSaver fees alone were at $717 million a year, in an industry that required no factories, machines or capital of any sort.
“It’s gravy train that no KiwiSaver manager wants to get off,” he said.
“There are some KiwiSaver managers out there charging over 1 per cent a year in fees. That’s the equivalent of a $10,000 rates bill on a $1m home. It’s laughably large, yet seems to fall within the guidelines,” Stubbs said.
He said until the FMA made an example of someone, he doubted anything would change.
The FMA’s guidance said fee reviews should focus on a number of factors, including whether manager fees were low enough to “appropriately” share the financial benefits of investing between a KiwiSaver manager and its savers.
Concerns over the fees on KiwiSaver cash funds have been raised as interest rates have reached very low levels after the Reserve Bank cut interest rates in a bid to stimulate the economy.
The FMA said there was no correlation between the fees KiwiSaver managers charged and the returns they provided to investors.
In general “active funds typically do not outperform their market index after fees over meaningful periods. Similarly, passive funds typically do not closely replicate their market index after fees” the FMA said.
An active fund is one where the manager attempts to use skill to provide a higher return, while a passive fund manager attempts to “mirror” the market they invest in.
Some KiwiSaver schemes offered active funds, some offered passive funds, and some took a mixed approach.